How to finance a franchise

Franchise financing options

• SBA 7(a) loan

  The most common route for new builds, acquisitions, equipment, and working capital. Backed in part by an SBA guarantee; loans up to $5 million.

• SBA 504 loan

  Long-term financing for real estate and major equipment, usually structured with a bank loan and a portion from a certified development company.

• Conventional commercial loan

  Bank financing without an SBA guarantee. More often available to established operators with strong financials.

• Equipment financing

  Loans secured by the equipment itself, with terms generally matched to its useful life.

• Refinance or consolidation

  Combining existing business debt into one facility to change the payment or term.

What lenders look for

• Brand strength and unit performance, from the FDD and the franchisor
• Your relevant experience and management ability
• Personal credit, which for SBA 7(a) often needs to start around the 660 range, though it varies by lender
• Liquidity and the size of your down payment
• Projected cash flow and the ability to cover debt payments
• Clean, complete documentation

Steps from brand to funding

1. 01

   Pick the franchise and confirm the total investment.

   Use the franchisor's disclosure document (FDD), especially the estimated initial investment and unit data, to build your project budget.

2. 02

   Decide how much you can put in.

   Lenders expect a down payment, often called an equity injection. Many expect around 10% or more, depending on the deal.

3. 03

   Gather your documents.

   Typical items include personal and business tax returns, a personal financial statement, liquidity statements, a resume, and the franchise agreement or letter of intent.

4. 04

   Match the deal to the right lenders.

   Lenders specialize by franchise concept, deal type, state, and size. Sending your file to the wrong lender costs time.

5. 05

   Compare offers and close.

   Compare rate, term, fees, and structure side by side, then work through underwriting and closing with the funding lender.